Maastricht School of Management, MSM Maastricht, the Netherlands Regional IT Institute, RITI Cairo, Egypt

Presented By: Ibrahim Kamel Miral Mourad Odette Morkos Suha Osman

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Background Causes Impact & Effects Attempted Solutions Current Economic Status Lessons Learnt Recommendations Domestic Case-Egypt References
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Official name: Argentine Republic Population: 40.2 million (UN, 2009) Capital: Buenos Aires Area: 2.8 million sq km (It is the eighth
largest country in the world by land area) 

Major language: Spanish Currency: peso

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machinery GNI per capita: US $7. mineral fuels.) Unemployment rate: 8. 2008) capita GDP .real growth rate is : :8.Main exports: Food and live animals. exports cereals.7% (07 est.4% (Jun 2007) line Argentina is rich in resources.) rate Life expectancy 72 years (men).200 (World Bank. 79 years (women) (UN) expectancy: Population below poverty line: 26. has a well-educated workforce and is one of South America's largest economies.5% (07 est. Argentina is the second largest country in South America 28-1-2010 4 .

Defeat in the Falklands War (against UK 1982) destroyed the infra structure . Introduction of neoliberal economic platform. By end of 1982 the industry severely affected and unemployment 20%. The State takeover of private debts.from 1976 to 1983(Military dictatorship):1983(Military dictatorship):Huge debt was acquired to implement projects of National reorganization process . 28-1-2010 5 . These projects were unfinished and debts had to paid .

Argentina had a crisis year every 3. 1975-76. 1929-32. y The latest crash in 2001/ 2002. That is. .Argentina s history of crisis y According to monthly data from 1885 to 2003. The five deep crises identified correspond to the years. 1989-91 and 2001-02. 1890-91. brought about a 15% decrease in real GDP and pushed vast sectors of the population below the poverty line.7 years. which implied 32 crisis years. It seems very difficult to match that record. there were 19 crises in 118 years of history.

The State takeover of private debts. By end of 1982 the industry severely affected and unemployment 20%. Defeat in the Falklands War (against UK 1982) destroyed the infra structure . Introduction of neoliberal economic platform. These projects were unfinished and debts had to paid . 28-1-2010 7 .from 1976 to 1983(Military dictatorship):1983(Military dictatorship):Huge debt was acquired to implement projects of National reorganization process .

(12 months afterwards inflation was controlled and its annual rate fell to 10% (end1993) and the rate kept falling after 1993 to level below 5% and to even deflation level at certain period. Decrease the three decades of chronic inflation. The real GDP grow to an average of 8% (1991-1994).From 1990 to 1999 (convertibility regime & GDP growth ) convertibility regime (Pesso at parity with US dollar) was introduced and had lead to: 1. 2. numerous structural reforms. 3. improvements in tax administration and greater control on expenditure. 5. Large domestic credit growth and a consumption and investment boom due to large capital inflows to the economy. 4. including privatization and opening of the economy. 28-1-2010 8 .

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Despite a few recessionary episodes were experienced. they were short lived and. relatively mild. output fell substantially. and unemployment increased to over 18 percent. except for the one that followed the Mexican crisis in early 1995. 28-1-2010 11 . interest rates rose sharply. The 1998 recession (both prolonged and severe) was triggered and then compounded by a series of adverse external shocks the Russian default and the LTCM (Long-Term Capital Management) crisis in August-September 1998 and the devaluation of the Brazilian real in January 1999.

The debts grew enormously ( because the IMF kept lending money and government spending continued to be high and corruption was rampant) and the country showed no true signs of being able to pay it. Decline in industrial activity has denied the government the cash to balance budgets. 28-1-2010 levels of unemployment and 12 .Lower export takings have limited the country's ability to earn the foreign currency needed to repay dollar-denominated debts . while "underemployment" top 30%.

authorities imposed a partial deposit freeze. 28-1-2010 At first the cacerolazos were simply noisy demonstrations. This allowance limit and the serious problems it caused in certain cases. Argentina began to experience severely diminished access to included property destruction. and political instability. many Argentines engaged in a form of popular protest that became known as Cacerolazo (banging pots and pans). led to the complete loss of market access.capital markets. often directed at banks. Uneven implementation of promised fiscal adjustment and reforms. By 2001. foreign privatized companies. but soon they 13 . intensified capital flight and a series of deposit runs (through massive tax evasion and money laundering) began to have a severe impact on the health of the banking system. a worsening global macroeconomic environment. These protests occurred especially during the period of 2001 to 2002. In 2000. The IMF responded to this by providing exceptional financial support. In December 2001. and especially big American and European companies.

such as using proceeds from privatization for current expenditures instead of debt reduction.  the limited ability of the federal government to control the expenditures of the provincial governments.1.  Irresponsible policies were pursued.  28-1-2010 14 . Fiscal policy (excessively lenient)  Poor transparency of financial operations widespread tax evasion.

Widening the current account deficit 28-1-2010 15 .The convertibility regime : Pegging the PESO to the USD although the USD appreciating & the brazilin real devaluating slow in growth & exports Causing a loss in competitiveness. Aligning monetary policy with that of the US leading to 1.2.Increase debt service ratio 2.

found it costly to raise funds in the international markets.3. Argentina. Outcome:the fall in inflows was not sudden because most of the debts had long maturities. 28-1-2010 16 .Decline in capital flows:Following the sharp reduction in global capital flows to emerging market economies in 1998. This was due to convertibility regime and relatively small size of its export sector. and slow development of domestic financial markets.

Foreign trade 3.4.Product markets 2.Utilities and Infrastructure Even though lots of trade barriers were removed. such as :1.Structural reform :Attempts to reform the labor market came to a virtual halt in the mid-1990s and progress in the liberalization of other areas was slow. 28-1-2010 17 . Argentina was still relatively a closed economy. limiting its ability to earn foreign exchange to repay its external debt .

Institutional and political factors limited the ability of the federal government to take decisive actions when confronted with a crisis. 28-1-2010 18 . Provinces are entrusted with public expenditures: Reducing flexibility of fiscal policy Corruption and other governance issues have also been cited as factors undermining the credibility of the authorities.5.

Debt dynamics: the combination of a large existing stock of external debt. rising country risk premia and sluggish growth caused the ratio of debt to GDP to rise uncontrollably. 28-1-2010 19 .7.

7.The banking system: The final stage of the crisis. which contributed to the loss of confidence in the currency and complicated attempts to restore stability once the convertibility regime collapsed. 28-1-2010 20 . a weakening of prudential defenses in the banking system.

 Argentina fell victim of an unusual sequence of external shocks that outbreak in emerging market economies in the second half of the 1990s. macroeconomic mismanagement. allowed the public debt to balloon to unsustainable levels. For others. the argument goes.The origin and causes of the 2001 disaster are at the core of the current policy debate. For some analysts.  The fixed exchange-rate regime was the a main drive for the destruction of the Argentine Economy . In particular the capital market crises in Asia and Russia. 28-1-2010 21 .  Finally. the strong appreciation of the US dollar and the successive devaluations in Mexico and Brazil. despite having allowed the Argentine economy to recover from hyperinflation and grow at unprecedented rates for a good number of years before its collapse. was not the exchange-rate regime per se the centre of Argentina s problems but its lax fiscal policy that.  The sharp decline in commodity prices.

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Results: Worsening Recession. Poverty and Unemployment . In 2001.Loss of Confidence & Capital Outflows Increased Inflation and Devaluation Climbing Budget Deficits Weaker Government Position Year 2000 & 2001 Increased Income Taxes Higher Recession Increased Devaluation Climbing I.R.- To Resolve the Massive fiscal budget deficits: In 2000. (40-60%) Loss of Confidence & Capital Out Flows Increased Finance Taxes 28-1-2010 Capital Outflows 23 . Government raised Income tax. Government imposed taxes on financial transactions.Climbing Budget Deficits Weaker Government Position .

Unemployment & Poverty Inflation 28-1-2010 24 .

Climbing Budget Deficits Weaker Government Position Year 2000 & 2001 Dual Exchange Rate Loss of Confidence Freezing Bank Deposits Financial Crisis Floating Peso 28-1-2010 25 . To Resolve the Devaluation & Budget Deficits: At End 2001.-Again. Government moved to Floating Exchange Rates. Government moved to Dual Exchange Rate system Results: Failure in reassuring the public & deposits withdrawal At Start 2002.

S. 28-1-2010 26 .Maintain peaceful relations with the poorest sectors of society through welfare programs (ex. Heads of Households). in exchange. Further cuts in the public sector workforce and a reduction in the salaries of government servants. beneficiaries had to engage in a work or training activity Success in negotiating some temporary loan agreements A new tax program is implemented coupled with creating a culture of taxpayers Government negotiated position with its private creditors that would involve at least 75% reduction in the value of defaulted independent debt. Delayed the payment of pension and decreased expenditures in the social sector by 70%. Attempted to impose a harsher budget aimed at restoring the $ 2.7 billion loans suspended by IMF & international agencies. plus likely reductions in interest rates on new bonds Increased export competitiveness by the convergence factor for foreign trade in no energy goods where exporters received a reimbursement. equivalent to the difference between the exchange rate pegged to the U. and importers paid a tax. dollar Government imposed limits on cash withdrawals from banks by remaining deposits frozen until at least 2003.

The economy soon began to recover. a GDP expected growth of 5%. as well as country risk premium. led by strong exports Unemployment dropped from 21% in 2002 to 10% at the end of 2005.8 in April 2003 Foreign currency reserves of Argentina's Central Bank. GDP grew robustly by 8-9% in each of the years 2003-2005. inflation was decreasing. Peso was appreciating against the US dollar from 3. The Peso strengthened to its current level of 3:1. in millions of USD 28-1-2010 27 .8 in June 2002 up to 2.1 participants limiting their ability to raise prices Signs of economic recovery started to appear.

it default and yet Argentina defaulted.29%. to help the country repay past loans. welcoming foreign ownership and The IMF agreed to lend Argentina $13. improving regulation and supervision IMF disregarded Congress approval to increase the IR at least 3% for countries IMF allowed Argentina to delay repayment of $2.IMF supported tax increases to reduce the government deficit IMF encouraged the devaluation process & discouraged the dollarization facing problems in their BOP and kept on lending with 2.8 billion for 1 year in order not to let IMF took steps to strengthen its banking system. Argentina would reform its economy and negotiate in good faith with the private creditors who hold $88 billion of sovereign debt it no longer services 28-1-2010 28 .5 billion. handed out in stages over three years. In return.

Lessons learnt The lessons from Argentina crises are summarized as: y Choosing the right exchange rate regime y The central importance of banking regulations/transparency y The proper sequence of reform measures (capital account liberalization) y The importance of contagion .

the appreciation of the dollar against the euro and the yen intensified the loss of competitiveness. as capital flowed out of the country following the Asian crisis. Moreover.Egypt pegged its currency to the dollar in 1991 but abandoned its peg in mid-2000. while tourism was affected by the aftershocks of terrorist attacks at home and abroad. 28-1-2010 30 . Pressure on the pound has increased since 1998.

but official reserves continued to decline and economic growth slowed. in January 2001. the country adopted an adjustable currency band 28-1-2010 31 .Egypt initially addressed the pressures through exchange market intervention and tighter credit policies. Exchange rate pressures did not decrease after an initial depreciation in mid-2000. and.

Domestic extension However. Foreign currency remained in short supply in the formal market at the prevailing official exchange rate. pressures on the pound intensified again after September 11. and a parallel exchange market emerged. leading to a depreciation of more than 35% against the dollar from mid-2000 to early 2003. Following the recent move to a floating regime. the exchange rate depreciated by 20%. 28-1-2010 32 . and the availability of foreign exchange in the formal market improved.

Its rigid peg of its peso to the dollar proved painful as the dollar appreciated in the foreign exchange market.Summary The Argentine crisis was a CURRENCY. 2001-2002 Argentina defaulted on its debts and abandoned the peso-dollar peg. and other measures. 2001 Argentina restricted residents withdrawals from banks in order to stop the run on the peso. . y y y y y y 1980s Argentina implemented successive inflation stabilization plans involving currency reforms. a BANK and DEBT larger sovereign DEFAULT in history) crisis and Inter-related but caused by a combination of different factors. 2002 Argentina established a dual exchange rate system and a single floating-rate system for the peso. 1990s Argentina adopted a currency board (peso-dollar peg). and then it stopped payment on its foreign debts. price controls.

uk.co Source: www.imf.mecon.org/External/NP/ieo/2004/arg/eng/index.ar/progeco/dsbb.cfm Source: www.htm Source: http://www.Source: http://www.htm Source: bbc.gov.org/dataoecd Source: http://en.org/subjectpages/trade.org 28-1-2010 34 .epinet.oecd.eurostat.wikipedia.wikipedia. Argentina's Central Bank Source: http://www.statistics Source: Banco Central de la República Argentina.org/wiki/Argentina Source: www.

Thank you 28-1-2010 35 .

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